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October 9th, 2008

Citigroup Report Plays on Fears



Jody Shenn of Bloomberg.com reported on a piece Tuesday titled “Libor Rise to Boost Subprime ARM Defaults 10%, Citigroup Says,” which documents a recent report released by Citigroup. According to the report, subprime defaults may increase 10% thanks to a boost in the six-month LIBOR rate from 3% to 4.02% back in mid-September. LIBOR rates, the rate in which banks charge each other to lend, has increased due to the continued stress on financial markets.

There were various aspects of Citigroup’s report that struck a negative chord with me. According to the report, after the LIBOR’s increase, the new monthly payment “would be $1,951, instead of $1,807, they said. Fannie Mae and Freddie Mac loans would be boosted to $1,021 on average, instead of $904.” On average, that’s a monthly increase of $130.5 extra a month. If an extra $130.5 a month is enough to attribute a 10% increase to the “vicious cycle,” as Citi puts it, what will happen when these borrowers face a true unexpected expense that rocks their monthly budget? Are a large chunk of borrowers so financially strapped that an increase of $131 dollars a month is enough to cause them to default on their mortgage?  Are these borrowers so leveraged that they can afford no change in their monthly bills? If so, this speaks loudly to the unregulated subprime lending practices that have polluted the mortgage pool with thousands of unqualified borrowers.

A new set of tires for your car can cost $400. What happens if these homeowners need to make an unexpected home repair, like replacing a broken window, or patching a hole in their roof?

Considering last year the LIBOR rate was over 5%, and six months from now the rate will likely drop from the increase Citi noted in their report, the latest rate increase is not all that dramatic.

What really concerns me is before these homeowners fail on their mortgage, will their loans be rescued or remodified by the government at the taxpayer’s expense — for increasing less than $800 over six months?

Lastly, the point of this article is lost on me. These types of reports do nothing but spread more fear and speculation into an already unsteady marketplace.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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